Will the surge in digital payments sustain?

Market leader Paytm, backed by Alibaba, says it is currently processing 5 million transactions a day and added over 14 million users in November.Indulekha Aravind | ET Bureau | January 02, 2017, 08:34 IST

ET Magazine dives into four startup sectors that have attracted a rash of entrepreneurs and millions of dollars. The mood is muted now, although the fintech space is proving an outlier post demonetisation. But will the surge in digital payments sustain?

"The entire country is now open for business," declares Bipin Preet Singh, cofounder of mobile wallet startup MobiKwik. Singh is referring to the wave unleashed by demonetisation and the Central government’s determination to drive the country towards a cashless society.

Following Prime Minister Narendra Modi’s announcement that Rs 1,000 and Rs 500 notes would no longer be legal tender from the midnight of November 8, fintech startups, particularly wallets and payment gateways, have seen business surge. Sequoia-backed MobiKwik, for instance, has seen a 200 per cent surge in app downloads and a 20-fold increase in peer-to-peer transfers.

Market leaderPaytm, backed by Alibaba, says it is currently processing 5 million transactions a day and added over 14 million users in November. Payment gateway PayU, which acquired Citrus Pay earlier this year, saw daily transaction volume skyrocket 80 per cent, which has settled to 25 per cent compared with pre-demonetisation. Tiger Global-backed Razorpay says volumes are now up 50-70 per cent over pre-demonetisation levels, after seeing an initial spike of 150 per cent.Snapdeal-backed wallet FreeCharge reported that 1,00,000 Snapdeal deliveries in mid-November were through the wallet, while Flipkart is aggressively marketing its wallet, PhonePe. It would seem that Christmas came early for fintech startups this year.

But Will It Stick?

With cash still scarce, wallet and other digital payment-enablers continue to see rapid doubledigit growth. But the billion-dollar question is whether this will sustain, once the cash crunch eases, as it inevitably will this year.

Founders are confident it will, primarily because of the unprecedented support from the government. "One of the biggest challenges for fintech companies was that the basic education for banking products and digital payments was not there. Now, with so much awareness created, consumers are going to take these fintech products a lot more seriously," says PayU India CEO Amrish Rau.

Razorpay CEO Harshil Mathur expects the habit to stick at least for high-value transactions and says this will also help ecommerce companies reduce the number of transactions on the expensive cash-on-delivery model. Paytm, too, says growth will continue. "We expect this growth to sustain for the long term and settle way higher than the current average," says Deepak Abbot, senior vicepresident, Paytm.

MobiKwik’s Singh goes so far as to say growth in digital payments no longer has to do with the scarcity of cash alone. "In the minds of customers and merchants, cash has lost its credibility and they would no longer like to depend on cash alone. You no longer need to convince a merchant about why he needs to use MobiKwik." His startup is currently enabling 361 toll plazas and around 30 per cent of petrol pumps to go cashless in a month which, he says, will help reinforce the credibility of cashless payments in the minds of the customer. The company has accelerated the deadline for its revenue target of $1 billion from December 2017 to mid-2017 or earlier.

But Forrester forecast analyst Satish Meena takes a more cautious view of the sustainability of some of the fintech businesses in the short term. "The focus has now shifted to getting more users and somehow making use of the current opportunity. It’s the GMV game that Flipkart and Snapdeal were playing. No one is going to look at building sustainable businesses or even think about breaking even in 2017," says Meena, who tracks consumer technology adoption and online retail.

Even the argument that the increase in digital payments would help ecommerce companies reduce their burn is undercut by the overall reduction in business the online retailers have been struggling with, feels Meena. "Orders have been decreasing by 20-30 per cent and are not expected to pick up till the cash situation returns to normalcy."

Wallets Vs Cards Vs UPI Vs…

Then there is the question of whether, even in digital payment adoption, consumers would pick and stick to wallets or choose other options.

Wallet-led startups say their product is low-cost, does not involve any hardware and can be scaled up rapidly. Of 15 million businesses in the country, only 1 million have PoS machines, making the other 14 million fair game for adoption, apart from other avenues. Payment gateway startups, understandably, beg to differ. "I personally think the concept of prepaid wallets has failed.

A recent RBI report on digital payments mentioned that even in November, only 3 per cent of transactions were through wallets, the rest were through cards. If wallet payment had taken off, it should have been 40:60," says PayU’s Rau. He argues that it is easier to get customers to use debit or credit cards as they are comfortable with it, than payments using ewallets and mobiles.Another challenge, say industry stakeholders, is building and retaining customer trust in a sector that is at an inflexion point. "Building customer trust and ensuring there are no breaches need to be kept in mind while scaling. But nobody is talking about it," says MobiKwik’s Singh. In the second week of December, the RBI asked prepaid and wallet companies to undergo a special audit on their security systems and take steps to comply with the findings of the audit. The government-backed United Payments Interface would also be competition for fintech companies.

Basic infrastructure and network challenges, too, remain a hurdle for a country trying to leapfrog to digital.

Eager to Invest

Hurdles apart, the sector is likely to see big rounds of fund-raising in 2017, with all the buzz around a cashless economy. "We have been getting a lot of calls from investors who want to know how demonetisation has been helping us. I’m sure that’s happening across the industry," says Mathur of Razorpay, which has raised funds from marquee investors like Tiger Global and a host of angel investors including Google X senior vice-president Jeff Huber and Snapdeal cofounders. PayU, while not looking to raise funds, is eyeing acquisitions.

"PayU is now on the prowl for interesting digital market plays in the Indian market," says Rau. Analysts tracking the sector say other areas in fintech likely to see a surge in 2017 include startups offering credit, particularly to small businesses and retail customers, those offering advisory services for money management and other paymentrelated services.

Will the bets on digital payments pay off? "We have to move beyond these six months to accurately evaluate the adoption of these methods because now, it has been forced on the customer. It’s not organic growth," says Forrester’s Meena.